Tax Plan Can Ease The Strain

Taxing times

September 18, 1991|By Boston Globe

There's a big problem with giving people tax tips at the end of the year: It's too close to the end of the year. By the time people are driving around with Christmas trees roped to the tops of their cars, there's not much time for tax-saving maneuvers to do much good.

That's why most tax advisers try to get their clients to think about tax planning all year. Being realistic, however, they know it's easier to bring up the subject in the fall, when people are back from vacation and the kids are in school.

''We're continuously doing tax planning throughout the year for our clients,'' says Ken Anderson, a tax partner in the Los Angeles office of Arthur Andersen & Co., accountants. However, he adds, several effective steps can be taken in the last quarter of the year.

People who are not self-employed should check their withholding to make sure they aren't having too little - or too much - taken out of their paychecks for taxes. Your employer's payroll department can give you the information.

''We strongly encourage everybody to check their withholding,'' Anderson says. ''You don't want to withhold too much and give the government an interest-free loan, but you don't want too little taken out so the government charges you a penalty.''

People who are not self-employed also have to save for retirement and if their employers offer a 401(k) or 403(b) retirement-savings plan, they should take full advantage of it. In fact, Anderson recommends, they might consider putting even more money in these accounts for the rest of the year, particularly if doing so might push them into a lower tax bracket.

For a couple, the 28 percent federal tax bracket starts at $34,000 and goes to 31 percent at $82,200. For a single person, 28 percent starts at $20,400, while 31 percent begins at $49,300. So if you think your 1991 income is going to be just above those levels, see if you can put more money in a 401(k) or 403(b) to get under the line.

This is also a good time to see how much your savings and investments are costing you in taxes. If your money is in a regular savings account or a money-market fund, think about shifting some of it into tax-free investments, like municipal bonds, bond mutual funds or unit investment trusts.

You can get a tax-free return of almost 7 percent in a municipal bond fund these days, but apparently a lot of people don't know it.

One reason for the low use of tax-free investments is that many people still think the government doesn't like them, says Jeffrey Augustine, portfolio manager of the Colonial Massachusetts Tax-Free Exempt Trust. ''They think it's some kind of scam,'' he says. In fact, the government encourages people to buy tax-free bonds, he says, because it means fewer federal dollars have to be spent on schools, roads, airports and other facilities.

Because this is the beginning of the charity fund-raising season, it's also a good time to think about making deductible donations and gifts. Again, if you start making donations now, you can ease your generosity by spreading the payments over the next few months.

Also, Anderson says, if you do a big fall cleanup around the house, look for clothing, furniture and other items to donate to the Salvation Army, Goodwill Industries or another charity. Then try to get a fair market value for those items by checking out newspaper ads or second-hand shops. Don't just dump the items in a collection box, though; get a receipt describing the item from the charity.

Considering the erratic behavior of the stock market lately, investors may want to take a look at their gains and losses for the year. If a stock's price has increased nicely since it was purchased, an investor might want to sell, assuming that a sale fits in with his or her long-range financial plans. Then, look for some securities where you've lost money to offset some of the gains.

''If it makes economic sense to sell something, we try to see how we can shelter some of that gain,'' Anderson says. ''We then ask clients if there are any positions in the portfolio where they've taken some losses.''

If there aren't any losses, you could give the stock away. If you donate stock to a charity, you don't have to report the gain, and you get a tax deduction for the gift. Or, Anderson suggests, you can set up a charitable remainder trust and put the securities there, so you can control where the money goes.

Finally, he notes, retirees receiving Social Security but still working part time should see how much money they've earned this year. Up to half of Social Security benefits are taxed for single individuals whose incomes from all sources - including pensions, wages, dividends and municipal bond interest - top $25,000. For couples, the limit is $32,000.

For the rest of the year, then, ''it might not pay to continue working,'' Anderson says.